-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KR1ms6T6XqwuGmKhWYitTh+nFPChSPlC3IFHOg96xQVHQf2ypzhwNlQWJwWg6ycJ 9sasLY7tXU6z/5nOKc3huw== 0001157523-06-000382.txt : 20060118 0001157523-06-000382.hdr.sgml : 20060118 20060118160212 ACCESSION NUMBER: 0001157523-06-000382 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060110 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Cost Associated with Exit or Disposal Activities ITEM INFORMATION: Material Impairments ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20060118 DATE AS OF CHANGE: 20060118 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVEX INC CENTRAL INDEX KEY: 0000050601 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 411223933 STATE OF INCORPORATION: MN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13143 FILM NUMBER: 06535701 BUSINESS ADDRESS: STREET 1: 5540 PIONEER CREEK DRIVE CITY: MAPLE PLAIN STATE: MN ZIP: 55359-9003 BUSINESS PHONE: 7634795300 8-K 1 a5057078.txt INNOVEX, INC. 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (date of earliest event reported): January 10, 2006 Innovex, Inc. ------------------------------------------------ (Exact name of Registrant as Specified in its Charter) Minnesota ------------------------------------------------ (State Or Other Jurisdiction Of Incorporation) 000-13143 41-1223933 - ---------------------------------------- ------------------------------------ (Commission File Number) (I.R.S. Employer Identification No.) 5540 Pioneer Creek Drive Maple Plain, MN 55359 - ---------------------------------------- ------------------------------------ (Address Of Principal Executive Offices) (Zip Code) (763) 479-5300 ------------------------------------------------ Registrant's Telephone Number, Including Area Code Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): |_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Items under Sections 1, 3 through 8 are not applicable and therefore omitted. ITEM 2.02 Results Of Operations And Financial Condition. The Company hereby furnishes a press release issued on January 16, 2006 and attached hereto as Exhibit 99.1 disclosing material non-public information regarding the Company's results of operations for the quarter ended December 31, 2005. The Company also furnishes a transcript of the Company's conference call which took place on January 17, 2006 at 7:30 am CST and attached hereto as Exhibit 99.2 disclosing material non-public information regarding the Company's results of operations for the quarter ended Dec. 31, 2005. ITEM 2.05 Costs Associated with Exit or Disposal Activities On January 10, 2006, the board of directors approved a plan to move all of the Company's prototyping and high volume manufacturing to its Asian operation over the next twelve months in order to reduce the Company's cost structure and ensure profitable future operations. The Company will divest the low volume, high density etched metal and flexible circuit manufacturing business located at its Litchfield, Minnesota manufacturing operation while retaining one Litchfield manufacturing facility for use in a development role once the products currently being manufactured in that facility reach their end of life. The restructuring charge could total up to $13 million over the next twelve months. Included in the total are non-cash asset impairment charges of $8.1 million that were recorded in the fiscal 2006 first quarter. The remaining expected restructuring charges will be recorded as the liabilities are incurred over the next twelve months. The additional cash related charges are expected to include severance costs of up to $2.5 million and facility abandonment costs of up to $2.4 million. The Company expects annual cost savings of approximately $8 million once the transition is complete with interim cost savings being realized as the operation dispositions are completed. Capital expenditures related to the restructuring plan will be minimal. ITEM 2.06 Material Impairments On January 10, 2006, the Company's board of directors approved a plan to move the Company's prototyping and high volume manufacturing to its Asian operation over the next twelve months in order to reduce the Company's cost structure and ensure profitable future operations. As a result, based on management's review of long lived assets as of December 31, 2005, it was determined that the value of the Company's Litchfield, Minnesota facilities and much of the manufacturing equipment located within those facilities was impaired. The review considered the cash flow related to the expected future use of those assets and resulted in the write down of those assets to their appraised value as discussed in Item 2.05. ITEM 9.01 Financial Statements And Exhibits. Exhibit No. Description - ----------- --------------------------------------------------------------- 99.1 Press Release issued January 16, 2006 99.2 Conference Call Transcript of January 17, 2006. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INNOVEX, INC. By: /s/ Thomas Paulson ------------------------------- Thomas Paulson Senior Vice President and Chief Financial Officer Date: January 16, 2006 EX-99.1 2 a5057078ex991.txt INNOVEX, INC. EXHIBIT 99.1 Exhibit 99.1 Innovex Announces Fiscal 2006 First Quarter Results MAPLE PLAIN, Minn.--(BUSINESS WIRE)--Jan. 16, 2006--Innovex (Nasdaq:INVX) today reported revenue of $50.5 million for the fiscal 2006 first quarter ending December 31, 2005, at the high end of guidance provided on November 7, 2005. This was a 26% increase from the $40.0 million reported for the prior year first quarter and a 6% increase over the fiscal 2005 fourth quarter. The Company's pretax loss, which included restructuring charges of $9.9 million, was $9.8 million in the first quarter of fiscal 2006 as compared to $1.7 million in the prior year first quarter and $2.9 million for the fiscal 2005 fourth quarter. The Company's net loss was $9.8 million or $0.51 per share in the first quarter of fiscal 2006 as compared to a net loss of $1.0 million or $0.05 per share in the prior year first quarter. The fiscal 2006 first quarter includes restructuring charges of $9.9 million or $0.52 per share of which $1.8 million relates to the Company's previously announced plan to close its Maple Plain facility and transfer operations to the Company's Lamphun Thailand facility. The remaining restructuring charge of $8.1 million in the first quarter relates to the Company's new plan to restructure its Litchfield, Minnesota manufacturing operations. The Company's fiscal 2006 first quarter net income excluding the restructuring charge was $160,000 or $0.01 per share. The Company's fiscal 2005 first quarter net loss of $1.0 million or $0.05 per share included restructuring charges of $343,000. The fiscal 2005 first quarter net loss excluding the restructuring charge was $0.03 per share. Restructuring The Company plans to move all of its prototyping and high volume manufacturing to its Thailand manufacturing campus over the next twelve months. The Company will divest the etched metal manufacturing business located at its Litchfield, Minnesota manufacturing operation. High volume, flexible circuit products currently being manufactured in Litchfield will continue to be manufactured there until they reach the end of their life cycle which is expected to be within the next nine to twelve months. During that time, the Company anticipates work force reductions corresponding to these products reaching their end of life. After that time, the Litchfield facility will be used to support the Company's new product development efforts. All new products entering production will be manufactured at the Company's Thailand facilities. The Company expects annual cost savings of approximately $8 million once the transition is complete with interim cost savings to be realized as the operation dispositions are completed. Capital expenditures related to the restructuring plan will be minimal. "We are extremely pleased to have recorded positive earnings excluding restructuring charges this quarter," stated William P. Murnane, Innovex's President and CEO. "This is the result of the significant progress we have made in reducing our cost structure over the past year and the outstanding progress of our operations team made improving scrap and efficiencies. Although we are pleased with our progress to date, we cannot and will not rest on our laurels. In pursuit of our cost leadership strategy, we continue to identify significant cost reduction opportunities and we are committed to moving forward aggressively on these opportunities. "Our Litchfield operation has been an important part of our success to date. In spite of our success there, we cannot ignore the large cost savings and competitive advantage to be gained by relocating our prototype and high volume manufacturing operations to Asia. We have a base of dedicated, hard working employees in Litchfield and we plan to maintain a core group of these employees to serve as the foundation for our new product development efforts," commented Murnane. Restructuring charges related to the Litchfield operations could total up to $13 million over the next twelve months. Included in the total are non-cash asset impairment charges of $8.1 million which were recorded in the fiscal 2006 first quarter. The remaining expected restructuring charges will be recorded as the liabilities are incurred over the next twelve months. The additional charges are expected to include severance costs of up to $2.5 million and facility abandonment costs of up to $2.4 million. The fiscal 2006 first quarter also included restructuring charges of $1.8 million related to the previously announced restructuring plan to close the company's Maple Plain manufacturing facility. These charges included non-cash asset impairment charges of $1.1 million and facility abandonment costs of $0.7 million. The Company completed the transfer of its manufacturing operations from its Maple Plain facility to Thailand and now has full flexible circuit manufacturing capabilities in Asia. Additional facility abandonment restructuring costs of $0.7 million are anticipated to be incurred related to the completion of the Maple Plain facility disposition over the next four months. Fiscal 2006 First Quarter The fiscal 2006 first quarter revenue increase over the prior quarter was related to higher Flat Panel Display (FPD) and Actuator Flex (AFC) revenue as Flex Suspension Assembly (FSA) revenue showed a modest decline during the quarter. Revenue excluding pass-through material was $27.6 million for the fiscal 2006 first quarter compared to $25.4 million in the fiscal 2005 fourth quarter. The revenue excluding pass-through increase over the prior quarter was primarily related to the increase in AFC and FPD demand. FSA products constituted 56% of the Company's net sales for the quarter, FPD product revenue was 23%, AFC revenue was 15%, integrated circuit packaging application revenue was 2%, network system application revenue was 2% and other revenue was 2%. The fiscal 2006 first quarter gross margin was 12.2%, compared to 9.7% for the fiscal 2005 first quarter and 8.7% for the fiscal 2005 fourth quarter. This improvement in gross margin reflects cost reductions related to the transfer of operations from the Maple Plain facility to the new Thailand facility, improved fixed cost absorption driven by increased revenue and operating efficiency gains. Operating expenses excluding restructuring charges for the fiscal 2006 first quarter of $5.4 million are down slightly from the $5.6 million reported in the fiscal 2005 first quarter and virtually unchanged from the fiscal 2005 fourth quarter. Operating expenses for the fiscal 2006 first quarter include approximately $200,000 of non-cash compensation expense for stock options related to the adoption of FASB Statement 123R Share Based Payments as of October 1, 2005. Cash flow from operations for the fiscal 2006 first quarter of $11.6 million primarily related to improved operations and the negotiation of shorter payment terms from a significant customer. Cash flow from operations was sufficient to cover capital expenditures of approximately $1.3 million for the quarter and help reduce debt outstanding by over $13 million. "We were able to reduce our debt outstanding to under $34 million while maintaining a $9 million cash balance primarily as a result of our positive cash flow from operations for the fiscal 2006 first quarter," stated Tom Paulson, Innovex's Chief Financial Officer. "With our improved operating performance, our current cash balance and unused credit facilities of over $29 million are more than adequate to meet any cash needs we may have related to our expected fiscal 2006 capital expenditures of $10 million and all restructuring related costs." In its fiscal 2006 second quarter, the Company expects revenue between $45 and $48 million and revenue excluding pass-through material content between $25 and $27 million. The expected decrease is related to normal seasonality while gross profit and operating income, excluding restructuring charges, are expected to remain similar to the fiscal 2006 first quarter as a result of operating improvements. Operating efficiency is expected to continue to improve throughout fiscal 2006. Conference Call & Live Webcast Innovex will conduct a conference call and webcast for investors beginning at 8:30 a.m. Eastern Time (ET) on Tuesday, January 17, 2006. During the conference call, Mr. Murnane and senior managers will discuss the Company's future product, revenue, mix and margin expectations along with historical results. To listen to the live conference call, dial 785-832-1508 and ask for conference ID "Innovex." The live webcast will be available at www.innovexinc.com/investor.shtml. A replay of the call will be available 9:30 a.m. ET on Tuesday, January 17 through 11:59 p.m. ET on Thursday, January 19, 2006. To access the replay, dial (402) 220-0116 and ask for conference ID "Innovex." The webcast version of the conference call will be archived at www.innovexinc.com/investor.shtml. About Innovex, Inc. Innovex, Inc. is a leading manufacturer of high-density flexible circuit-based electronic interconnect solutions. Innovex's products enable the miniaturization and increasing functionality of high technology electronic devices. Applications for Innovex's products include data storage devices such as hard disk drives and tape drives, liquid crystal displays for mobile telecommunication devices, flat panel displays and printers. Innovex is known worldwide for its advanced technology and world class manufacturing. Safe Harbor for Forward Looking Statements Except for historical information contained herein, the matters discussed in this Current Report on form 8-K are forward looking statements that involve risks and uncertainties, including the timely availability and acceptance of new products, impact of restructuring charges, changes in product mix, the impact of competitive products and pricing, effect of world-wide economic conditions on flexible circuit demand, changes in manufacturing efficiencies, fluctuations in financial results and other risks detailed from time to time in the Company's reports filed with the Securities and Exchange Commission. INNOVEX, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands) Three Months Ended December 31, ------------------------------- 2005 2004 --------------- --------------- Net sales $50,508 $40,041 Costs and expenses: Cost of sales 44,348 36,142 Selling, general and administrative 3,647 3,493 Royalty expense to equity investee 411 378 Engineering 1,389 1,709 Restructuring charges 9,929 343 Net interest expense 449 210 Net other (income) expense 104 (583) --------------- --------------- Income (loss) before income taxes (9,769) (1,651) Provision for income taxes - (643) --------------- --------------- Net income (loss) ($9,769) ($1,008) =============== =============== Net income (loss) per share: Basic ($0.51) ($0.05) =============== =============== Diluted ($0.51) ($0.05) =============== =============== Weighted average shares outstanding: Basic shares 19,227 19,128 =============== =============== Diluted shares 19,227 19,128 =============== =============== INNOVEX, INC. CONSOLIDATED BALANCE SHEETS (In thousands) December 31 September 30 Assets 2005 2005 ------------- ------------ Cash and short-term investments $9,269 $12,914 Accounts receivable, net 24,225 32,585 Inventory 17,395 17,744 Other current assets 1,633 1,314 - ---------------------------------------------------------------------- Total current assets 52,522 64,557 Property, plant and equipment, net 55,631 66,507 Intangible & other assets, net 6,670 6,762 Deferred income taxes long term - - - ---------------------------------------------------------------------- Total assets $114,823 $137,826 ============= ============ Liabilities and Stockholders' Equity Current liabilities $36,126 $48,632 Long-term debt 26,888 27,818 Stockholders' equity 51,809 61,376 - ---------------------------------------------------------------------- Total liabilities and stockholders' equity $114,823 $137,826 ============= ============ INNOVEX, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) Three months ended December 31, ------------------------------- 2005 2004 --------------- --------------- Cash Flows From Operating Activities: Net income (loss) ($9,769) ($1,008) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 2,966 2,721 Asset impairment charges 9,196 - Other non-cash items 171 (176) Changes in operating assets and liabilities: Accounts receivable 8,360 1,900 Inventories 349 (5,001) Other current assets (228) (1,435) Accounts payable 938 4,068 Other current liabilities (430) 3,060 --------------- --------------- Net cash provided by (used in) operating activities 11,553 4,129 Cash Flows From Investing Activities: Capital expenditures (1,290) (9,092) Proceeds from sale of assets 13 - --------------- --------------- Net cash used in investing activities (1,277) (9,092) Cash Flows From Financing Activities: Net long-term debt activity (63) 2,814 Net line of credit activity (13,881) 4,729 Proceeds from exercise of stock options 23 80 --------------- --------------- Net cash provided by (used in) financing activities (13,921) 7,623 --------------- --------------- Increase (decrease) in cash and equivalents (3,645) 2,660 Cash and equivalents at beginning of period 12,914 14,422 --------------- --------------- Cash and equivalents at end of period $9,269 $17,082 =============== =============== CONTACT: Innovex, Inc., Maple Plain Tom Paulson, 763-479-5300 or Douglas W. Keller, 763-479-5300 EX-99.2 3 a5057078ex992.txt EXHIBIT 99.2 Innovex, Inc. INVX Q1 2006 Earnings Call Jan. 17, 2006 Company Ticker Event Type Date - -------------------------------------------------------------------------------- MANAGEMENT DISCUSSION SECTION Operator: Welcome to today's teleconference. At this time, all participants are in a listen-only mode. Later there will be an opportunity to ask questions during our question-and-answer session. I would now like to turn the program over to your speaker Mr. Murnane. Go ahead, sir. William Murnane, CEO - -------------------------------------------------------------------------------- Thank you, Jennifer. Good morning and welcome to our first quarter conference call. With me this morning, as usual, is Tom Paulson, Innovex's Senior Vice President and Chief Financial Officer and Doug Keller, Innovex's Vice President of Finance. Before I get going, I will read our Safe Harbor statement. Except for historical information, the matters discussed in this call are forward-looking statements and involve risks and uncertainties, including the timely availability and acceptance of new products, the impact of competitive products and pricing, effect of worldwide economic conditions on flexible circuit demand, changes in manufacturing efficiencies, and other risks detailed from time to time in the company's reports filed with the Securities and Exchange Commission. To start, I would like to make a few comments on the strategic importance of the recently announced restructuring. Tom Paulson will give more details on the restructuring in his comments as well. Roughly two years ago, we set out to become a low cost manufacturer of flexible circuits within the technology spectrum in which we compete, and made that objective our top priority. The first step in this effort was to build a new state-of-the-art front-end flexible circuit manufacturing facility on our campus in Lamphun, Thailand, which we completed in mid-2005. Next, we were able to transfer all operation from our Maple Plain, Minnesota manufacturing facility into the new Thailand facility. This transition was completed last month when we ceased manufacturing in Maple Plain, and this transition is now generating annual cost savings of $4 million. We continuously analyze our business for additional cost reduction opportunities and have now identified actions to further leverage our low cost operation in Thailand and continue to reduce our cost structure. Yesterday afternoon, we announced that all prototyping and high volume manufacturing for new products will be moved to our Thailand manufacturing campus. High volume products that are currently being manufactured in Litchfield, Minnesota will continue to be manufactured there until they reach end of life, which we anticipate to be approximately 12 months from now. During the next 12 months, we will size the work force appropriate in Litchfield, Minnesota to meet the demand for the end of life products. We expect to move all prototyping to our Thailand campus by the end of June 2006. We will immediately begin efforts to sell our metal etching business based in Litchfield, including the facility and equipment to support the metal business. Our metal etching business generates approximately $2 million in the annual revenue. We will continue to own and maintain our overall flexible circuit manufacturing facility in Litchfield, Minnesota and we use it for our new product and process research and development efforts. Once all these actions are completed, we expect annual cost savings of $8 million. We expect to receive the full benefit of these cost savings in March 2007 quarter. Although this decision was extremely difficult emotionally, we believe it is fully in line with our cost leadership strategy and it will provide a competitive advantage as we pursue new business opportunities throughout the world. I will now turn the call over to Tom Paulson, who will provide additional information on the restructuring and information on the quarter's - on the recent quarter's financials. I will follow Tom with some comments on our December quarter performance and the outlook for the next quarter. Tom? - -------------------------------------------------------------------------------- www.CallStreet.com o 212.931.6515 o Copyright (C) 2004 CallStreet 1 Tom Paulson, CFO & SVP - -------------------------------------------------------------------------------- Thank you Bill. First I will provide additional details on our restructuring efforts and then comment on the first quarter's financials. Total restructuring charges in the first quarter were 9.9 million, 1.8 million of the charges related to the previously announced plan to close Maple Plain and transfer our operations to Thailand. These overall efforts remain on target and the quarterly expected savings of $1 million were fully achieved in the current quarter. The plan to restructure Litchfield Minnesota operations drove the remaining restructuring charge of 8.1 million. The total charges associated with these efforts that we will take over the next 12 months will be up to 13 million. Restructuring of 8.1 million taken in the first quarter were non-cash asset impairment charges. Additional charges of up to 4.9 million will be taken over the next year. These costs are forecasted to be evenly distributed between severance and facility abandonment costs. Capital spending associated with this plan are expected to be $100,000 or less since full start-to-finish flexible circuit manufacturing capabilities now exist in Asia. Annual cost savings of approximately 8 million are forecasted once the transition is complete. Based on current and the life forecast for high volume products on Litchfield today, this level of savings will be fully achieved during the second quarter of next fiscal year. Modest savings are expected in the second and third quarters of this fiscal year. We've approximately 800,000 anticipated in the fourth quarter. I'll now move on to discuss first quarter's financials. Revenue for the first quarter of fiscal 2006 was 50.5 million, which is at the high-end of guidance and represented 6% sequential growth. Revenue excluding pass-through material content was 27.6 million, which was up 9% versus the fourth quarter of fiscal 2005. Revenue from FSA was 56% of total sales, down 6 percentage points versus the fourth quarter while Actuator Flex continued its expected increase to 15% of total sales. Flat Panel Display revenue moved from 15% of total sales in the fourth quarter to 23% in the first quarter. This increase represented sequential quarter-on-quarter growth of over 60%. The aggressive actions that were taken on many fronts improved operations over the last three quarters of fiscal 2005 in conjunction with savings from the transfer of operations from Maple Plain to Thailand drove - improved the gross margin of 3.5 percentage points versus the September ending quarter to 12.2% of net sales. Operating expenses were 5.4 million in the first quarter. This spending level was flat versus the September ending quarter even after including 200,000 of non-cash expenses for the adoption of FAS 123. The achievement of pre-tax profitability of 200,000 in the quarter excluding restructuring is a very important milestone in our continuing efforts to achieve operating margins of 10%. Cash flow from operations was 11.6 million positive on the strength of improved operations and the negotiations of improved terms from an important customer. Depreciation was flat versus the fourth quarter at $3 million. Capital spending for the quarter is 1.3 million and we remain confident that capital spending for the year will be within the previous guidance of 10 million. Total debt decreased by over 13 million in the quarter and to a quarter ending level of under 34 million. We maintained a cash balance of over 9 million and have availability of existing credit facilities of over 28 million in Thailand. We continue to forecast positive cash flow from operations over the next three quarters and remain confident that annual cash flow will be adequate to fund - to fully fund capital spending and cash restructuring charges while paying down debt ahead of schedule. Bill will now share further details on the quarter and the future. William Murnane, CEO - -------------------------------------------------------------------------------- Thanks Tom. Demand in the first quarter started out a little slower than expected, strengthened as the quarter progressed and finished very strong. We are very pleased that we were able to significantly improve gross margins during the quarter and to have recorded positive earnings excluding the restructuring charges. The operations team performed very well during the quarter, they improved scrap considerably and made strong efficiency gains, which were the two main drivers behind our gross margin improvement. FSA revenue declined 4% over the previous quarter to 28.3 million or 56% of total revenue. - -------------------------------------------------------------------------------- 2 Current customer forecast indicate FSA demand will remain strong in the first half of the March quarter and then begin to decline in the second half of the March quarter. Our flat panel display revenue increased 61% over the previous quarter to a 11.6 million or 23% of total revenue. We expect flat panel display demand to decrease modestly in the March quarter due to seasonality. Actuator Flex Circuit or AFC revenue increased 15% over the previous quarter to 7.6 million or 15% of total revenue. AFC growth was generated by strong demand for notebook products and from the ramp up of next generation AFC programs. We expect AFC revenue to continue to grow in the March quarter as we pick up market share in conjunction with the ramp up of next generation hard disk drive products. We remain confident that our AFC business will grow considerably in fiscal 2006. We also remain confident that the AFC growth will offset the decline in our FSA business. Stacked memory revenue declined over the previous quarter to 1.2 million or approximately 2.5% of revenue. We expect stacked memory demand to be relatively flat in the March quarter. Overall outlook for the March quarter, we expect demand for the quarter to be steady and strong - excuse me, demand as we enter the quarter is steady and strong. Given that we typically experience the seasonal decline in the March quarter, we are forecasting slightly lower revenue between 45 and 48 million for the quarter. We expect revenue excluding the pass-through material content for the March quarter to be between 25 and 27 million. In spite of the lower revenue, we are forecasting gross profit and operating income in the March quarter to be similar to the December 2005 quarter just completed as a result of improved operation. The overall outlook for 2006 for the balance of 2006, fiscal 2006 - excuse me, once again we would like to remind our shareholders that we will see a transition in our business in fiscal 2006. We will see the 80-gigabyte per platter FSA product go end of life during the year. We now anticipate the 80-gigabyte per platter product will begin to decline in the second half of the current quarter. Although the 80-gigabyte per platter FSA products will go end of life, we have additional next generation FSA product that should run at reasonable volumes throughout fiscal 2006 and should allow us to maintain the significant yet smaller FSA business. In addition we are qualified on the number of next generation AFC products that are currently ramping to high volumes giving us a natural hedge as the hard disk drive industry transitions to the next generation of technology. As I stated earlier, we remain confident that the AFC growth will offset the decline in our FSA business. We continue to perform well on current flat panel display products and gain qualifications on new flat panel display products. We expect our flat panel display business to remain steady throughout fiscal 2006 with the modest ups and downs along the way due to seasonality. We are progressing well on a number of product development efforts that are targeted at the Inkjet printer, mobile phone and stacked memory market. Success in any one of these products will generate very significant growth for Innovex. We do not anticipate these products will generate significant revenue in fiscal 2006, but we certainly do hope to make important product qualification announcements in fiscal 2006 followed by considerable revenue growth in fiscal 2007. We expect to continue to improve gross, operating and net margins throughout fiscal 2006 as we gain additional cost benefits from the ramp up of our new front-end factory in Thailand from our recently announced restructuring and from our focused cost reduction efforts. Last and most importantly, as Tom stated, we expect to continue to generate positive operating cash flow in fiscal 2006. Also as Tom stated, we will have more than adequate cash flow to fund all of our capital expenditures and meet our principal and interest obligations on our bank loans. We planned to use our excess free cash flow to pay down additional debt. Before I open up the line for questions, I would like to make one more last comment related to the risks associated with our restructuring and moving the balance of our prototype and high volume operations to Thailand. Over a year ago, when we moved our Maple Plain operations to Thailand or announced that we are moving our Maple Plain operations to Thailand we needed to build and staff a brand new factory from the scratch. We had to invest approximately $15 million in new plant and equipment. Moving our Maple Plain operations also required us to requalify almost every product we were making in the new factory. For this move that we are currently looking, the factory already exists, it required almost no capital investments and all high-volume production products are already qualified in the factory. The bottom line that we should generate $8 million in annual savings, doubled the amount we saved by moving Maple Plain with significantly less risk. Jennifer, we will now open the lines for questions. - -------------------------------------------------------------------------------- 3 QUESTION AND ANSWER SECTION Operator: Sure. At this time, if you would like to ask a question, please press the star and one on your touchtone phone. You may withdraw your question at anytime from the queue by pressing the pound key. Again, please press the star and one if you would like to ask a question. We will take our first question from Rich Kugele from Needham & Company. Go ahead, sir. Q - Rich Kugele>: Thank you. Good morning. I guess, first, can you just remind us how the margins, the gross margins compare on the AFC business versus the FSA business - with the understanding that there is lot of pass through on the FSA, but on the non-pass through keys how do those margins compare? A - Tom Paulson>: The AFC margins are higher. Richard, rather not comment on exactly how much higher perhaps some customers listening on the conference call. But, on an overall basis the margins on the AFC products are higher than the FSA products. Q - Rich Kugele>: Okay. And as you look out nine to 12 months, you've had a lot of restructurings obviously you have had some success reducing your costs, but when you look at the Litchfield move being completed, how should we think about a SG&A or R&D type of percentages of sales? A - Tom Paulson>: I think we anticipate that SG&A will come down as you look down 12 months below. We aren't really calculating a lot of that into the cost savings. Cost savings that we are talking about are primarily of the cost of goods sold, but there should be some level of SG&A savings associated with that move. Especially if you look down 12 months or so. A - William Murnane>: Yes. If you look at the 8 million, Rich, this is a directional number for about 80 to 85% of the 8 million will hit the gross margin line, the rest will hit the operating expense line. Q - Rich Kugele>: Okay that's helpful. And then I guess finally, that this is going to be another transition year, but you should have your cost structure exceeding the year completed. As you look into fiscal 2007, what do you think the fastest of the three growth areas that you have been highlighting in the past between the LCD and the AFC and the stacked memory, which of those three do you think is going to be the greatest driver? A - William Murnane>: At this point in time, Rich, we actually hit a milestone on the inkjet printer cartridge product. In that we now have 100% confidence that our product that we have developed works and can pass all tests that will be put at from a reliability standpoint. So, given that situation there and given the state of the printer business worldwide, I would say that probably has the greatest chance. I will say that it's going to work out that way, but with our crystal ball today that would probably have the greatest chance of being successful next fiscal year. Q - Rich Kugele>: Okay. Thank you very much. A - William Murnane>: You are welcome. Operator: Thank you. We will take our next question from Christina Schwab from Craig-Hallum. Go ahead, ma'am. Q - Christian Schwab>: It's Christian actually. But, following up on Richard's question Tom, what is the operating model, target operating model is going to look like in March of 2007, when all our cost structure initiatives are in place? - -------------------------------------------------------------------------------- 4 A - William Murnane>: The easiest way to think about that Christian would be that, if you look at, if nothing else changed and our mix of business stayed the same, that $8 million of saving would improve our margin structure by about 400 basis points. So, - and as you know, I mean, that would take us - that take us, getting - heading down the path of where we want to get to, but we still aren't - - on that basis, we still aren't towards 20% gross margin structure, ideally with other improvements of somewhere in the 16% range or so. But our objective is still to get to that 20% gross margin level and 10% operating margins. Q - Christian Schwab>: Right. So, at that point, March of 2005, you would kind of be running depending upon rounding kind of the 5 to 6% operating margin levels, is that fair? A - Tom Paulson>: That's fair. Q - Christian Schwab>: Thanks. And can you remind us, in fact, about the entrepreneur market opportunity for a long time, there is only two significant players, there are customers to target and one significant competitor. So, what would be the opportunity in 2007? Can you just remind us of the revenue and gross margin opportunity there? A - William Murnane>: Well, Christian, we, I don't think, have guided any revenue there. We do think that both of the big players in that market today have sizable business. We do think we have got a reasonable market share from a potential customer, which would be 20 or 25%. We don't think there would be anything much smaller than that and the margins are probably in line with our targeted gross margins, probably the best I can tell, we are not going to - we don't disclose product gross margins, but they will be very respectable. That's probably the best I can do. Q - Christian Schwab>: Right, greater than 20% so? A - William Murnane>: Perhaps. Q - Christian Schwab>: And then, the flat panel display, you talked about typical seasonality, that business really has been, in my opinion, experienced typical seasonality. So, can you just walk through what typical seasonality would be expected out of that business? A - William Murnane>: It's actually similar to the hard disk drive industry is - - typically, the December quarter is the strongest and then we see some decline in March and June, and then we see the seasons, the holiday seasons pick up begin again. It's not as strong as we have experienced in the disk drive industry, but we have now - we haven't been in the business for that long, it's longer than three years now, and in high volumes for a little over a year. But our experience is it's similar, perhaps not as extreme as the hard disk drive. Q - Christian Schwab>: And then one last question, is there any risk in your business with Maxtor with the acquisition of them, potentially by Seagate and they have been - I think you are the number one market supplier of actuator flex to them. Is there any - can you give us your opinion of risk assessment there? A - William Murnane>: Yes, I think we view that as relatively neutral for us. I think everyone knows Maxtor and Seagate are two of our largest customers. We have great relationships with both. We have a number of product qualifications with both and we think - we certainly don't expect that to be bad news for us. We don't know that it will present much of a big upside, we think it will be relatively neutral to us relative to the plan that we have in place for next year and beyond. Q - Christian Schwab>: Great, one last question, another year of - kind of cost restructuring phase of your company, can you give us any type of - I mean is the growth phase of this business really dependant upon actuator flex? - -------------------------------------------------------------------------------- 5 A - William Murnane>: Well, I think, number one, the growth phase of this business is dependant upon having the right cost structure and that has been our objective for the last two years and although it requires some significantly heavy investing, we are feeling really good about the end of this process. We are now on the down slope and we have got a low-cost operating model that we can leverage the heck out off, and we weren't really interested in trying to leverage that operating model and now, we have a good one and in fact I think, hopefully everyone can see now, we can really leverage this thing, that is going to only open up more doors, make us more competitive and allow us to grow certainly from the new product standpoint, the three areas we mentioned are where we are focusing our energy. Now that we think there is a incremental business that we are going to be able to go after with this new low cost operation, really being ready to go in Thailand. Q - Christian Schwab>: And I am sorry. The capacity that you have in Thailand facility Tom, and what kind of quarterly or yearly revenue and I know it is kind of would depend upon mix etc., etc. So, give us a kind of a Mack truck? A - William Murnane>: I will take that Christian. A lot of it depends on the mix. So - but from a revenue ex pass-through we think we can probably get off into this 50 million per quarter range, so we have got a fair amount of capacity available. The overall revenue depends on how much material pass-through we have in the products, so it is better to focus on revenue ex pass-through. And even that is somewhat subject to products but we are - I would say we have got certainly 40 and probably $50 million on a quarterly basis. Q - Christian Schwab>: And where are you, William, currently? A - Tom Paulson>: In the high-20s. Q - Christian Schwab>: Great, thank you. Operator: Again, if you would like to ask a question please press the star and one on your touchtone phone. We will take our next question from [indiscernible] go ahead. Q>: Hi. A - William Murnane>: Good morning. Q>: How you are doing Bill? Couple of questions, first - two questions actually. Can you just take me through the process a little bit in inkjet cartridge business, if you are going to potentially get revenues in '07, what happens now and what happens between now and then, I guess? A - William Murnane>: Certainly, I think we are in a position now where as I said before, we are a 100% positive, we have a product that works, the next step is to work out business terms with a potential customer and really agree to move forward. If we can work those business terms out, which we hope to do in the next three or so months, then we would begin a qualification process and we think that is a nine to 12 month process, because there is a number of iteration that just have a fixed amount of time because the circuit that we may have to run through a certain qualification process at a reasonable volume. Just to make sure that there is nothing that was missed in the reliability testing. So, that is why we have got - we have to - we are going to - it is going to take the balance of this fiscal year to work through all of that. Q>: So, the first time that little on me [indiscernible] somebody's product would be this time next year? A - Tom Paulson>: Yes, I think certainly in fiscal 2007, if it was 2006 was just too quick and we think based on what we know today. - -------------------------------------------------------------------------------- 6 Q>: Another question I had, obviously cash flow was enhanced by the equational receivables, was that just one customer was it multiple customers that accounted for the increase in cash? A - Tom Paulson>: It is just one customer. Q>: Thank you. And I guess that is all I have. Operator: There are no further questions in queue. A - William Murnane>: Okay, thanks Jennifer, thanks everyone for joining us this morning, we look forward to speaking with you again next quarter. Have a great day. Operator: This concludes today's teleconference, please disconnect at this time. - -------------------------------------------------------------------------------- 7 -----END PRIVACY-ENHANCED MESSAGE-----